Billionaire investor Carl Icahn's net worth plunged by over $10 billion on Tuesday after short-seller Hindenburg Research accused him of using a "ponzi-like" economic structure at his investment company. Icahn Enterprises L.P., his publicly traded holding company, fell by 20%, the most on record, wiping out $3.1 billion from his fortune. In addition, Hindenburg detailed the investor's margin loan collateralized by his stake in the company, which was not previously accounted for by the Bloomberg Billionaires Index and resulted in another $7.3 billion being knocked off his net worth calculation.
As a result of these developments, Icahn's fortune sank by an unprecedented 41% to $14.6 billion, dropping him from the world's 58th-richest person to the 119th. This year, Hindenburg has targeted several billionaires, including India's Gautam Adani and Block Inc.'s Jack Dorsey. Icahn owns over 85% of Icahn Enterprises' units through various entities, making up the bulk of his fortune. Hindenburg alleged that the company was over-leveraged and traded at an extreme premium to its net asset value, with investments in funds managed by Icahn and controlling stakes in businesses in the energy, automotive, food, and other sectors. The short-seller also questioned how the company valued some of its investments.
In a statement, Icahn dismissed the report as "self-serving" and "intended solely to generate profits on Hindenburg's short position." Icahn has increased his holding in Icahn Enterprises by taking dividends in the form of additional units. Before Tuesday's decline, his stake was worth $15.7 billion compared with $8.4 billion in 2017, even as the value of its shares declined 4.9%.
According to Hindenburg, other unit holders received their dividends in cash, making the company attractive to retail investors. This was only possible because of Icahn's decision to take his payment in units, since the company was consistently operating with negative cash flows. Icahn began reporting a margin loan collateralized by his stake in the company in 2021, at a time when he had about 65% of his shares pledged. He increased the number last year, and as of February, had over 181 million shares worth $9.2 billion backing the loan, according to the company's 2022 annual report.
Margin loans involve lending that's collateralized by the value of the underlying shares. If the value of the stock declines, lenders can request additional collateral or for the loan to be repaid and have the ability to seize and sell the shares if a borrower fails to do so. Hindenburg criticized Icahn for failing to disclose how much he had borrowed, the interest rate or the loan-to-value maintenance ratio associated with the margin loan.
Icahn's second-largest asset is his stake in his investment funds, which he uses to make activist bets. Icahn Enterprises, Carl Icahn, and his son Brett are the only investors in the funds. At the end of last year, Icahn had $4.9 billion invested. Hindenburg calculated that the fund could be down about 17% this year, based on an estimate of the performance of its long and short positions.
Hindenburg's attacks on the companies of Adani and Dorsey caused drops in their fortunes this year of $58 billion and $500 million, respectively.